Fed vs RBI during covid and post covid – how they handled inflation - Testimonials of other

banks/govt on fed interest rate hikes

https://www.brookings.edu/articles/fed-response-to-covid19/#:~:text=Easing%20Monetary
%20Policy&text=These%20cuts%20lowered%20the%20funds,borrowing%20for%20households
%20and%20businesses.
https://www.cbpp.org/research/economy/tracking-the-recovery-from-the-pandemic-
recession#:~:text=But%20the%20recovery%20and%20relief,the%20third%20quarter%20of
%202020.
https://www.bankrate.com/banking/federal-reserve/fed-to-slow-balance-sheet-drawdown/
#:~:text=Key%20takeaways,of%20credit%20in%20the%20economy.
https://www.weforum.org/agenda/2022/09/the-us-dollar-is-decimating-world-currencies-heres-how-
other-countries-are-responding/

As the opposition spoke about the impact caused by fiscal policies of several govt during the time of
covid and its impact on inflation, we must also consider the series of expansionary fiscal policies that
was taken by Fed during this period to provide support to the dipping US economy. These policies
were:
a. Federal funds rate - The Fed cut its target for the federal funds rate, the rate banks pay to
borrow from each other overnight, by a total of 1.5 percentage points at its meetings on
March 3 and March 15, 2020. These cuts lowered the funds rate to a range of 0% to 0.25%.
The federal funds rate is a benchmark for other short-term rates, and also affects longer-term
rates, so this move was aimed at supporting spending by lowering the cost of borrowing for
households and businesses.
b. Forward guidance - Using a tool honed during the Great Recession of 2007-09, the Fed
offered forward guidance on the future path of interest rates. Initially, it said that it would
keep rates near zero “until it is confident that the economy has weathered recent events and is
on track to achieve its maximum employment and price stability goals.” In September 2020,
reflecting the Fed’s new monetary policy framework, it strengthened that guidance, saying
that rates would remain low “until labor market conditions have reached levels consistent
with the Committee’s assessments of maximum employment and inflation has risen to 2% and
is on track to moderately exceed 2% for some time.” By the end of 2021, inflation was well
above the Fed’s 2% target and labor markets were nearing the Fed’s “maximum employment”
target. At its December 2021 meeting, the Fed’s policy-making committee, the Federal Open
Market Committee (FOMC), signaled that most of its members expected to raise interest rates
in three one-quarter percentage point moves in 2022. Main point here Fed told it will
increase rates once inflation crosses target threshold of 2% but still kept maintaining
low rates(almost 0) after March 2021
c. Quantitative Easing - At
the onset of the pandemic in March 2020, the
Federal Reserve began increasing its balance sheet by buying large
quantities of Treasury debt and mortgage-linked securities (known as
quantitative easing, or QE). When the Fed grows its balance sheet, it
essentially ends up printing money — albeit digitally. The Fed
purchases an asset, then credits banks’ reserve accounts with cash
 in equal value. The financial system thus becomes awash with more
liquidity, hopefully spurring greater lending among financial firms.The
Fed resumed purchasing massive amounts of debt securities, a key tool it employed during the
Great Recession. Responding to the acute dysfunction of the Treasury and mortgage-backed
securities (MBS) markets after the outbreak of COVID-19, the Fed’s actions initially aimed to
restore smooth functioning to these markets, which play a critical role in the flow of credit to
the broader economy as benchmarks and sources of liquidity. On March 15, 2020, the Fed
shifted the objective of QE to supporting the economy. It said that it would buy at least $500
billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed
securities over “the coming months.” On March 23, 2020, it made the purchases open-ended,
saying it would buy securities “in the amounts needed to support smooth market functioning
and effective transmission of monetary policy to broader financial conditions,” expanding the
stated purpose of the bond buying to include bolstering the economy. In June 2020, the Fed
set its rate of purchases to at least $80 billion a month in Treasuries and $40 billion in
residential and commercial mortgage-backed securities until further notice. The Fed updated
its guidance in December 2020 to indicate it would slow these purchases once the economy
had made “substantial further progress” toward the Fed’s goals of maximum employment and
price stability. In November 2021, judging that test had been met, the Fed began tapering its
pace of asset purchases by $10 billion in Treasuries and $5 billion in MBS each month. At the
subsequent FOMC meeting in December 2021, the Fed doubled its speed of tapering,
reducing its bond purchases by $20 billion in Treasuries and $10 billion in MBS each month.
(Again main point here, Dec 2021 was too late already inflation had picked) – Ecoomy was
back to normal long before
Next we can also the impact the gradual increase in interest rates by Fed from April 2022 had
on other emerging markets and economies.

U.S. rate rise can have a number of indirect effects internationally. It not
only increases the cost of borrowing dollars; it also encourages investors to
park their money back in the United States, draining poorer countries of
investment. That, in turn, tends to boost the value of the dollar relative to
other currencies, making it harder for poorer countries to pay back their
U.S.-dollar-denominated debt.

A rising dollar is causing pain overseas in a number of ways:

1. It makes other countries’ imports more expensive, adding to existing

inflationary pressures.

2. It squeezes companies, consumers and governments that borrowed in

dollars. That’s because more local currency is needed to convert into
dollars when making loan payments.

3. It forces central banks in other countries to raise interest rates to try and
prop up their currencies and keep money from fleeing their borders. But
those higher rates also weaken economic growth and drive up
unemployment.
The stronger dollar has prompted more rate hikes around the world as
central bankers try to increase the value of their own currencies. Over the
past few months, several countries have been increasing the pace of their
hikes, with rates in some places now exceeding 10%.

But raising rates in parts of the world where currencies are being devalued also
raises recession risks. “The Fed...can probably get away with raising rates,” said
David Beckworth, an economist at the Mercatus Center at George Mason University.
The US economy is relatively stable, given the strong labor market. But other
economies, including the euro zone, don’t have that cushion.

Emerging economies with big dollar-denominated debt balances have been

particularly hard hit. A couple weeks ago, Argentina put a ban on 31 imports that it
deemed nonessential, including yachts and whiskey. Because of the fall of Nigeria’s
local currency, the naira, food prices have driven inflation in Africa’s largest economy
to nearly 20% on a yearly basis. After defaulting on its foreign debt in May, Sri
Lanka’s repayment costs continue to soar.

On Monday, the Philippine peso weakened against the US dollar to a new all-time
low amid the strengthening of the greenback due to the hawkish stance of the
Federal Reserve to tame inflation.

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The local currency closed at P56.999:$1, shedding 22.9 centavos from Friday’s
close of P56.77:$1, its previous record low

The peso almost plunging to P57 against the US dollar has never been seen before.

But how does a weaker peso against its US counterpart affect inflation and the purchasing
power of Filipinos?

The Philippine Statistics Authority (PSA) and economists weigh in.

At a press conference on Tuesday, National Statistician and PSA chief Claire Dennis Mapa
said that although the purchasing power of the peso is not computed based on the US dollar’s
value, its inflationary impact could affect the local currency’s purchasing value.
“Strong dollar versus the peso has an impact on the items in the consumer price index,” Mapa
said, noting that imported commodities such as petroleum, which are bought using dollars,
could impact local pump prices and, therefore, affect inflation.

“Purchasing power of the peso is really a function of inflation. [A stronger US dollar] will
affect the purchasing power of the peso only if the strong dollar will have an impact on our
headline inflation,” Mapa said.

The PSA chief added that the purchasing power of the peso or the value of P1 in
2018 remained at 86 centavos in August this year as inflation slowed down to 6.3%, albeit
still elevated.

Sought for comment, Rizal Commercial Banking Corporation chief economist Michael
Ricafort said that, since the start of 2022, the peso depreciated against the US dollar by nearly
12%.

“[M]eaning the costs/prices of imported oil, other commodities, and other products already
became more expensive by nearly 12% since the start of 2022, assuming all other factors are
the same, already much higher or more than double the average inflation of 4.9% from
January-August 2022,” Ricafort explained.

“Thus, the weaker peso exchange rate would contribute to higher overall inflation and would
fundamentally erode the purchasing power of the peso relative to the US dollar as there
would be more pesos needed to pay the same amount in US dollars, clearly showing the
outright deterioration of the peso’s purchasing power.”